Are You Leaving Money on the Table? 10 Myths about Price Setting
Pricing Pointers, Issue #10
Effective price setting is vital for business success, yet many small businesses fall prey to pervasive myths about pricing that dampen their sales and profits. How many of these common beliefs have been quietly shaping your pricing decisions?
Myth 1 - Pricing should be based on the cost of the product
Buyers don't care about your costs.
Buyers do care about how much value they will get from your product or service compared to their alternatives.
Cost-driven pricing often leads to over- or underpricing relative to what buyers are willing to pay.
Remember: Costs should not be the sole determinant of your selling price.
Myth 2 - The value of a product or service is an objective measurement
The value of any product or service is subjective; it depends on who the buyer is.
This subjective value is not based on the product's objective attributes.
Instead, it's determined by the buyer's perception of the benefits they receive from a particular feature or function.
Value is also contextual; a buyer's valuation can change as their circumstances change.
Remember: You can change the value of your product simply by moving it to different buyers, times, or places.
Myth 3 - Every buyer is willing to pay the same price for the same product
Because value is subjective and contextual, different buyers will have significantly different willingness-to-pay (WTP) for the same product or service.
However, it is seldom in a buyer's self-interest to honestly reveal their true maximum willingness-to-pay.
These differences in WTPs present a practical problem: how to figure out who is willing to pay what.
Remember: Different buyers are willing to pay different maximum prices for the same thing.
Myth 4 - You must choose between charging a higher price or selling more
The idea that you must choose between selling more at a lower price or selling less at a higher price is a false choice.
This is only true when you decide to charge every buyer the same price for every unit.
But you don't have to do that. You can charge a higher price to some buyers and a lower price to other buyers.
Remember: You can charge different buyers different prices for the same thing.
Myth 5 - Charging a single, uniform price maximizes sales and profits
Charging every buyer the same price reduces your sales and profits in two ways.
First, you sacrifice profits from buyers who would have paid more.
Second, you sacrifice sales and profits from prospective buyers who would be willing to pay more than your product's unit cost, but less than your asking price.
Remember: Charging a range of prices is more profitable than a single price.
Myth 6 - It is easy to identify which buyers are willing to pay more or less
It's one thing to know buyers differ in their willingness to pay. It's another thing to know which buyers are willing to pay more.
Buyers often claim they care more about price than they really do as a bargaining tactic.
A key workaround is to offer buyers a range of prices that reflect a trade-off between what they pay and the value they receive.
Remember: Make buyers give up something they value in return for a lower price.
Myth 7 - Implementing a differential pricing strategy is too complex and costly
You do not have to haggle over price with each and every buyer.
Present all buyers with a clear set of options at different price points. Let buyers select the option that best fits their needs and budget.
This tactic causes buyers to naturally sort themselves based on their price sensitivity.
It is also more practical than haggling – especially for low-margin sales.
Remember: Let buyers sort themselves by how price sensitive they are.
Myth 8 - Charging different customers different prices is inherently unfair
Charging different buyers different prices for the same thing isn't necessarily unfair (or illegal).
But it can create resentment among buyers when they discover others paid less for the same thing.
This is especially true if the price difference is based on criteria that are outside the buyer's control.
The key to avoiding perceptions of unfairness is to base price differences on what the buyer does or chooses, rather than who they are.
Remember: Give every buyer the same opportunity to pay less if they are willing to meet the required condition (e.g., buy a larger quantity).
Myth 9 - Charging a lower price will always lead to an increase in sales volume
For a price cut to increase profitability, the increase in sales volume must be large enough to offset the negative effects of a lower price per unit.
Here are two reasons why this may not happen. First, buyers probably aren’t as price sensitive as they claim to be.
Second, lowering your price is the easiest move for your rivals to duplicate.
Remember: Across-the-board price cuts are risky.
Myth 10 - Adding more features to a product will automatically enable you to charge a higher price
Adding features and functionality will increase your development and/or production costs.
That does not automatically mean buyers will perceive the additions as valuable.
The additions must be things that are important enough to buyers that they are willing to pay to get them.
And the increase in the perceived value must be greater than the increase in price.
Remember: Buyers determine the value of your product's features and functionality, not you.